Chapter 6: Oil, Economy, and Development (Introduction to Middle East Politics)

The economics of the Middle East is a mixed picture. Some oil producing countries have seen rapid economic growth, while others like Israel, Turkey, and Tunisia have relied on strong service sectors. But inflation, unemployment, and corruption continue to undercut economic potential in the region.

The economies in the Middle East have structural issues, including over-dependence on oil revenues, and the influence of the informal economy. When countries are too reliant on oil, their GDP fluctuates in a very volatile manner, depending on the rise or fall of oil prices.

Many factors, such as technology, geopolitics, security, demand and supply dynamics, affect the price of oil. This volatility creates uncertainty, which is something investors don’t like.

The informal economy is not the black market, although the black market is part of the informal economy. Anything that occurs outside the watchful eyes of the government, without taxation and regulation, is the black market, but the informal economy also includes the ‘grey economy’ which is when there is the same lack of taxation and regulation, but through government channels and networks.

Informal economies have long been a part of the landscape of the region and this is due to the weakness of institutions, which facilitates the use of grey markets through bribery and corruption.

There are many reasons why the Middle East has such a large informal economy, including excessive labor market regulations, a lack of state ability to regulate employment, and high taxes on domestically produced goods. Most of the activity in the informal sector revolves around unregulated employment.

There is a problem in trying to fix the situation since many people depend on the informal economy for their livelihood.

The Politics of Oil

The importance of oil to the world is a key factor that has shaped how external powers have engaged with the nations of the Middle East. The impact of oil on the region has been mixed, since material wealth, that has increased greatly, has not seen a parallel increase in human development.

The downside of natural resources like oil is known as the ‘resource curse’. Economic development has been unsatisfactory in many oil producing states, and a form of autocratic rule in the form of a rentier state has become common.

The US does not only benefit from the supply of Middle East oil but form the stability of its prices – this became apparent after the 1973 oil price crisis when OPEC imposed an oil embargo in response to Nixon’s announcement that he would send air supplies to Israel.

YARPP List

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